An extended period of careful preparation, nervous anticipation, and optimism for the future culminating in a joyous event. This is then followed by years of devotion, hard work and oversight to ensure maximum success.
Parents of children recognize the preceding sequence, which they share with an unlikely community. Large-scale renewable energy (LSRE) power purchase agreement (PPA) buyers can also relate. Just as the birth of a child is followed by the lengthier and often more challenging process of raising a child into adulthood, a PPA buyers work does not stop after signing a deal. After completing a well-negotiated, risk mitigated, economically healthy PPA, buyers must continue to manage the contract post-commercial operation date (COD) to secure continued success.
The rise in corporate procurement of renewable energy has received considerable industry media attention over the past few years. Headlines like this one applaud corporates for shattering clean energy procurement records. Commercial and industrial (C&I) organizations have contracted for an astounding 8.7 GW of large-scale offsite renewable PPAs in 28 global markets to date in 2018.
While signing a renewable PPA is a noteworthy accomplishment for any organization in terms of environmental and fiscal responsibility, the story does not end when the press release hits the wire and a deal is added to PPA tracker charts. As with new parents who have come home from the hospital, corporates tasked with managing and optimizing a PPA post-COD face a substantial undertaking that requires close attention and oversight over an extended period of time.
PPAs come with a host of known and easily anticipated post-COD activities, such as auditing invoices and recording performance. But there are also unexpected challenges that may occur and must be dealt with.
Over the lifetime of a 10- to 20-year PPA contract, market conditions, ISO or RTO protocols and broad-set laws, incentive schemes or regulations will inevitably change or emerge; how these changes affect a company’s PPA performance in the long-term can be uncertain. Even when a PPA is performing as expected today, it does not mean that tomorrow (or in 5 years) something unexpected might demand attention. As you’ll see in the examples below, with contracts of this magnitude, slight changes can have an outsized impact.
Wise PPA buyers use a variety of strategies embedded in the PPA and over the life of the agreement to manage the challenges inherent to their contract(s) and to navigate unforeseen events that arise. The most important strategy is getting the terms and conditions of the PPA right in the first place and properly allocating risk among the parties. Working with experienced advisors and council who have not only negotiated many PPAs but have also managed them (and seen the real-life pain that the addition or omission of certain terms can cause) is paramount.
Once a good deal is in place, ongoing management of the PPA should guarantee contract compliance, limit exposure to market fluctuations and generally ensure a PPA is delivering the intended results. As with committed and intentional parenting, embedding the following 6 questions into a long-term PPA management plan will help to address basic needs and prevent unexpected disturbances to set the PPA up for success.
- Are my Invoices Correct?
Invoice management and validation is the foundation to a successful PPA management program. It’s the primary line of defense against erroneous billing and sets the foundation for other critical activities needed to manage a PPA. A good program monitors and corrects mistakes on monthly invoices (which happens more than you would think) and makes certain that a PPA is settling at the appropriate price in the appropriate volumes as dictated by the contract. This is accomplished by collecting the right data from the PPA seller in a format that can be easily analyzed and manipulated, which sets the groundwork for additional PPA management capabilities.
Over the past 2 years Schneider Electric has found invoice errors totaling over $1M across our clients’ PPA portfolios. In one specific case, correcting a misplaced decimal in an invoice resulted in $30,000 savings for the buyer.
- Am I getting the RECs that I was expecting?
Renewable energy certificates (RECs) are produced alongside the electricity generated by a PPA project and are needed by buyers to make environmental claims. However, it’s important to know the characteristics of the RECs supplied along with a PPA and what to do with them once you get them. For instance, RECs may be supplied to buyers through a specific third-party tracking system or registry which would require the buyer to open and maintain an account with the registry. PPA buyers may also desire that the RECs be certified by a third party such as Green-e©; if so, the buyer typically is responsible to have them certified themselves.
Although certification is not explicitly mandated to claim the renewable energy attributes from a PPA, certification is considered best practice and gives companies the added benefit of knowing that their RECs meet industry standards for sustainability reporting and disclosures. Companies should also ensure that the RECs produced by their project match the commitment that they are communicating publicly. If production falls short, it may be necessary to buy more RECs. The process of REC management and certification can be rigorous and must be done correctly.
- Is my project performing financially as expected so far? How will it perform for the remainder of the term?
PPA buyers will inevitably ask questions like, “What should I be telling my management to expect over the next 12 months with this deal?” or “How has it performed thus far?”. Frequent financial performance reporting helps a PPA buyer anticipate near-term cash flow expectations. This step is also important for accurate, up-to-date messaging to management and includes updates to NPV forecasts and potentially guidance to investors in public companies.
When a company signs a PPA, they accept varying degrees of exposure to financial settlements. Some PPAs provide a hedge against an existing short energy position or fix a price for physical power while others have more inherent risk to volatile market prices. Financial performance reporting can take several forms, including analysis of how the project is performing from a profit and loss standpoint, comparison of actual performance vs. expectations and future forecast and, depending on the accounting treatment, what the mark-to-market implications are. The results of these analyses can inform potential risk management strategies a company may choose to employ (discussed later).
- Is my counterparty fulfilling the contractual terms we agreed on?
Contract compliance goes beyond invoice management to confirm that PPA contracts are being enforced in the intended manner. This can involve conflict resolution with project sellers and requires a deep understanding of best practice and industry standards.
One example of this strategy in action occurred when a corporate PPA buyer came to Schneider Electric ESS to scrutinize their PPA’s performance. Following an expert-level review of contractual terms and conditions, it was discovered that an ambiguity in contract terms was resulting in missed revenue for the buyer. After clarification of this critical wording with the seller, the offtaker was able to regain missed revenue and arrange that the adjustment will carry through the lifetime of the contract. The long-term result of this corrected ambiguity will be over $1,000,000 in revenue for the buyer over the life of the contract.
Compliance may also take the form of ongoing management. For example, an impactful market event such as a change in law or an upgrade in market design could have an impact on PPA performance. It is therefore vital to stay current to relevant regulations and market fluctuations that could influence a PPA contract.
- How are we messaging our commitment?
Effectively communicating the sustainability impact of a renewable project, both internally and externally, can elevate the significance of a PPA commitment. There is no one-size-fits-all approach to reporting and communications, but there are some standard best practices that can both drive reputational value for a company and avoid potential scrutiny from NGOs. Engaging marketing teams early in the PPA procurement process has proven effective for many buyers in post-PPA communications.
- Am I keeping up with emerging tactics and strategies?
Advanced risk management techniques require time, constant awareness of market evolution, and a dedicated, knowledgeable team to execute successfully. These strategies, some of which are well established while others are still emerging, ensure positive revenues and appropriate, long term financial risk mitigation.
For example, regardless of if a project is performing well or poorly, offtakers have the option of hedging a portion of their PPA term to eliminate downside risk and increase future price certainty. When projects are showing positive, third parties such as energy traders will take the market exposure from the corporate and in exchange guarantee the offtaker a consistent price per MWh during the hedge.
Conversely, if a PPA project for any reason is performing below expectations, being prepared to hedge or exit the contract can save a company from financial losses. The best way to set up a contract for effective hedging over the term is to get the PPA terms right to start (how the deal is settled, what information is available to the buyer, etc.). Regardless of the starting point, however, there is always something that can be done to address financial risk or volatility during the operational life of a project.
Similar to raising a child, the work in managing a PPA does not stop once the project comes to life. Ongoing management techniques help maximize your company’s benefits. Having a holistic PPA management strategy in place is the key to ongoing success of the deal. These activities range from straightforward to highly complex. In combination, they can be a significant effort, but are well worth the work to raise a successful PPA.
Get in touch with our team to learn more about how PPA management strategies could benefit your organization.